Resilience

The Israelis have a code word, ha matzav ("the situation") for the perpetual stage of national siege and stress that defines their country’s conflict with the Palestinians.
Remarkably, despite ha matzav and its repercussions on the economy, the Israeli stock market rose 50% in 2003. But, while the negative economic impact has been substantial, investment manager Yoram Gabbay points to the strength of the macro-economic picture in Israel.
In a recent interview, Gabbay, board chairman of the Peilim, the portfolio management arm of the Bank Hapoalim Group, listed some of the factors that have propelled the Israeli market:
— A 30% rise in government bond prices fostered by heavy European investment in five- to 10-year maturities and a concomitant interest rate drop from 12% to 7%.
— Heightened productivity.
— Increased exports, principally high tech.
— Profitable banking and insurance sectors.
— A reduction in risk related to renewed U.S. loan guarantees to Israel.

It’s a "strange phenomenon," he said, that such upside co-exists with unemployment of over 10% in a labor market with potentially long-term problems. Globalization in the 1990s contributed, as many contend is the case in the United States, as have early retirement packages of 150% to 200% of salaries and a government payments program that has increased 500% since 1990.
There is also another, uniquely Israeli, issue: the ultra-Orthodox comprising 10% of the population, but with 22% of Israeli children, many leaving school without marketable skills.
Like the United States, Israel has many foreign workers, about 270,000 of whom half are there illegally. Many work as caretakers for the elderly and sick.
Yet the economy, though not necessarily poised for strong growth, is at least stabilizing, says Gabbay, from the devastation of the past few years.
Bright spots include the continuation of a five-stage tax reform process that began in 2003 and a 5% to 10% reduction in public sector wages, perennially a political hot potato in a country with bureaucrats who hark back to Israel’s socialist roots when it comes to their pay and benefits.
High tech, Israel’s "competitive advantage" in Gabbay’s view, is rebounding from a crisis period that tracked the tech downturn in the United States since 2000. Between the presence in Israel of such high-profile American companies as Intel and Israel’s indigenous tech industry selling to US customers, the comparison is hardly surprising.
It almost goes without saying that one sector savaged by "the situation" is tourism, a pillar of Israel’s economic strength for decades. Another area that lingers on the downside is real estate. Gabbay calls the commercial side "a disaster" because of supply that disproportionately outweighs demand. Residential is slightly better, if only because construction of new apartments has virtually stopped, affording the potential to match demand.
Unemployment and relatively low salaries among young people have fed a trend of returning home to live with their parents. A "wait and see" attitude makes renting preferable to buying. Only in the upscale areas of Jerusalem and Tel Aviv are prices holding at high levels, although recent slight gains in the suburbs are cause for hope.
A seasoned figure on the Israeli financial scene, Gabbay previously served in the government, chiefly as the longtime director general of the Internal State Revenue agency, Israel’s counterpart to our IRS. His firm, an independent arm of Bank Hapoalim, manages assets of over 3.7 billion shekels (about $830 million US). About two-thirds of its clients are individuals.
An academic economist by training, he still lectures at Hebrew University in Jerusalem, and has served on International Monetary Fund commissions.
Gabbay optimistically expects the correlation between his country’s stock market and the U.S. market to be very high this year. In Israel investor sentiment is buoyed by good market news from here. Yet, he views the 2004 American election as "irrelevant" to what he foresees as the continuing upward trend in Israeli stocks.
Of course, there is still plenty to worry about in Israel. Both sides in "the situation" – the Israeli army and Hamas – are "exhausted," from Gabbay’s perspective. He sees the Israeli and Palestinian populations hungering for a peace that their leaders do not deliver.
In this interview, conducted in December during a temporary multi-month lull in terrorist attacks in Israel’s cities, Gabbay expressed his personal dismay that Israel budgets so much for West Bank and Gaza settlements while ignoring the country’s internal social problems and inequities between rich and poor Israelis. An effective cease-fire easing national uncertainty would be a boon, says Gabbay.

Linda Frank, a former Milwaukeean now living in Denver, does business development for an investment firm. She can be reached a linda@franknet.net.

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